nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒02‒04
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy and exchange rate dynamics By Stavrakeva, Vania; Tang, Jenny
  2. Optimal Monetary and Macroprudential Policy in a Currency Union By Jakob Palek; Benjamin Schwanebeck
  3. Policy and Macro Signals as Inputs to Inflation Expectation Formation By Paul Hubert; Becky Maule
  4. Country Portfolios, Collateral Constraints and Optimal Monetary Policy By Ozge Senay; Alan Sutherland
  5. Country Portfolios, Collateral Constraints and Optimal Monetary Policy By Ozge Senay; Alan Sutherland
  6. Optimal Monetary Policy, Exchange Rate Misalignments and Incomplete Financial Markets By Ozge Senay; Alan Sutherland
  7. The final countdown: the effect of monetary policy during "Wait-for-It" and reversal periods By Ozdagli, Ali K.
  8. Taming macroeconomic instability: Monetary and macro prudential policy interactions in an agent-based model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  9. TCross-Border Banking and Business Cycles in Asymmetric Currency Unions By Lena Dräger; Christian Proaño
  10. Comparing the Transmission of Monetary Policy Shocks in Latin America: A Hierarchical Panel VAR By Pérez, Fernando
  11. Interest Rates Rules By Ceri Davies; Max Gillman; Michal Kejak
  12. The implications of liquidity expansion in China for the US dollar By Wensheng Kang; Ronald A. Ratti; Joaquin L. Vespignani
  13. Optimal monetary and fiscal policy at the zero lower bound in a small open economy By Bhattarai, Saroj; Egorov, Konstantin
  14. The role of oil prices and monetary policy in the Norwegian economy since the 1980s By Q. Farooq Akram; Haroon Mumtaz
  15. The effects of a stronger dollar on U.S. prices By Diez, Federico J.; Gopinath, Gita
  17. Monetary policy, financial dollarization and agency costs By Vega, Marco
  18. Effects of US quantitative easing on emerging market economies By Bhattarai, Saroj; Chatterjee, Arpita; Park, Woong Yong
  19. Crisis, contagion and international policy spillovers under foreign ownership of banks By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  20. Early observations on gradual monetary policy normalization By Rosengren, Eric S.
  21. An argument for positive nominal interest By Bloise, Gaetano; Polemarchakis, Herakles
  22. What can Big Data tell us about the passthrough of big exchange rate changes? By Lewis, John
  23. The Transmission of Monetary Policy through Redistributions and Durable Purchases By Vincent Sterk; Silvana Tenreyro
  24. Oil prices and global factor macroeconomic variables By Ratti, Ronald; Vespignani, Joaquin
  25. Inflation as a global phenomenon - some implications for policy analysis and forecasting By Kabukcuoglu, Ayse; Martinez-Garcia, Enrique
  26. Mobile money and household food security in Uganda By Murendo, Conrad; Wollni, Meike
  27. Identifying periods of financial stress in Asian currencies: the role of high frequency financial market data By Dungey, Mardi; Matei, Marius; Treepongkaruna, Sirimon
  28. The case for a financial approach to money demand By Xavier Ragot
  29. Term-Structure Modelling at the Zero Lower Bound: Implications for Estimating the Term Premium By Tsz-Kin Chung; Cho-Hoi Hui; Ka-Fai Li
  30. Liquidity traps, capital flows By ACHARYA, Suchant; BENGUI, Julien
  31. Global or domestic? Which shocks drive inflation in European small open economies? By Aleksandra Hałka; Jacek Kotłowski
  32. The evasive predictive ability of core inflation By Jose Luis Nolazco; Pablo Pincheira; Jorge Selaive
  33. Should the Fed Increase the Interest Rate to Promote Financial Stability? By Benjamin Eden

  1. By: Stavrakeva, Vania (London Business School); Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: Financial markets regard exchange rate movements as conveying information about future expected policy rates. This paper explores the empirical link between conventional and unconventional monetary policy surprises and exchange rate fluctuations at a quarterly frequency. It examines these links using the currencies of ten developed economies calculated against four base currencies: the U.S. dollar, the British pound, the Deutschmark/euro, and the Japanese yen. Two periods are studied: 1990:Q1–2008:Q4, when the U.S. dollar hit the zero lower bound (ZLB) in December 2008, and the ZLB period between 2009:Q1 and 2015:Q1. The authors decompose exchange rate movements using a standard no-arbitrage asset pricing equation and two alternate interest rate forecasting models—a standard Taylor rule and a yield factor model. This decomposition reveals how contemporaneous unanticipated monetary policy surprises and changes in the expected future paths of policy are linked to exchange rate changes directly through relative interest rates as well as indirectly through expected excess returns and expected long-run exchange rate levels. The authors also use this decomposition to measure the fractions of the estimated effects of conventional and unconventional monetary policy surprises on exchange rate changes that are due to each component of the exchange rate change.
    JEL: E43 F31 G12 G15
    Date: 2015–10–29
  2. By: Jakob Palek (University of Kassel); Benjamin Schwanebeck (University of Kassel)
    Abstract: The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule.
    Keywords: financial frictions, credit spreads, borrowing constraint, monetary policy, macroprudential policy, optimal policy mix, currency union
    JEL: E32 E44 E58
    Date: 2015
  3. By: Paul Hubert (OFCE); Becky Maule (Bank of England)
    Abstract: How do private agents interpret central bank actions and communication? To what extent do the effects of monetary shocks depend on the information disclosed by the central bank? This paper investigates the effect of monetary shocks and shocks to the Bank of England’s inflation and output projections on the term structure of UK private inflation expectations, to shed light on private agents’ interpretation of central bank signals about policy and the macroeconomic outlook. We proceed in three steps. First, we correct our dependent variables – market-based inflation expectation measures – for potential risk, liquidity and inflation risk premia. Second, we extract exogenous shocks following Romer and Romer (2004)’s identification approach. Third, we estimate the linear and interacted effects of these shocks in an empirical framework derived from the information frictions literature. We find that private inflation expectations respond negatively to contractionary monetary policy shocks, consistent with the usual transmission mechanism. In contrast, we find that inflation expectations respond positively to positive central bank inflation or output projection shocks, suggesting private agents put more weight on the signal that they convey about future economic developments than about the policy outlook. However, when shocks to central bank inflation projections are interacted with shocks to output projections of the same sign, they have no effect on inflation expectations, suggesting that private agents understand the functioning of the central bank reaction function and put more weight on the policy signal when there is no trade-off. We also find that the effects of contractionary monetary shocks are amplified when they are accompanied by positive shocks to central bank inflation projections. The coordination of policy decisions and macroeconomic projections thus appears important for managing inflation expectations.
    Keywords: Monetary policy; Information processing; Signal extraction; Market-based inflation expectations; Central bank projections
    JEL: E52 E58
    Date: 2016–01
  4. By: Ozge Senay (University of St. Andrews); Alan Sutherland (University of St Andrews and CEPR)
    Abstract: Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks.
    Keywords: Optimal monetary policy, Financial market structure, Country Portfolios, Collateral constraints
    JEL: E52 E58 F41
    Date: 2016–01–29
  5. By: Ozge Senay (University of St. Andrews); Alan Sutherland (University of St Andrews and CEPR)
    Abstract: Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks.
    Keywords: Optimal monetary policy, Financial market structure, Country Portfolios, Collateral constraints
    JEL: E52 E58 F41
    Date: 2016–01–29
  6. By: Ozge Senay (University of St. Andrews); Alan Sutherland (University of St Andrews and CEPR)
    Abstract: Recent literature on monetary policy in open economies shows that, when international financial trade is restricted to a single non-contingent bond, there are significant internal and external trade-offs that prevent optimal policy from simultaneously closing all welfare gaps. This implies an optimal policy which deviates from inflation targeting in order to offset real exchange rate misalignments. These simple models are, however, not good representations of modern financial markets. This paper therefore develops a more general and realistic two-country model of incomplete markets, where, in the presence of a wide range of stochastic shocks, there is international trade in nominal bonds denominated in the currencies of the two countries and equity claims on profit streams in the two countries. The analysis shows that, as in the recent literature, optimal policy deviates from inflation targeting in order to offset exchange rate misalignments, but the welfare benefits of optimal policy relative to inflation targeting are quantitatively smaller than found in simpler models of financial incompleteness. It is nevertheless found that optimal policy implies quantitatively significant stabilisation of the real exchange rate gap and trade balance gap compared to inflation targeting.
    Keywords: Optimal monetary policy, Financial market structure, Country Portfolios
    JEL: E52 E58 F41
    Date: 2016–01–27
  7. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston)
    Abstract: After a long period of loose monetary policy triggered by the Great Recession, some central banks are signaling that they will raise their policy rates soon. Previous research, for example, Bernanke and Kuttner (2005) and Ozdagli (2014), has shown that asset prices react more strongly to monetary policy target surprises on the dates of such a policy reversal announcement. However, we know very little about the channels that generate these effects and whether the cross-sectional differences among firms and sectors play a significant role in transmitting a reversal decision to the economy, a question of primary interest for investors and policymakers.
    Keywords: monetary policy; stock prices; liftoff; gradualism; forward guidance
    JEL: E44 E52 E58
    Date: 2015–09–01
  8. By: Lilit Popoyan (Laboratory of Economics and Management (Pisa) (LEM)); Mauro Napoletano (OFCE); Andrea Roventini (Department of economics)
    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 dfferent levers of Basel III andtheir 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 simplifiedregulatory framework. Finally, the components of Basel III are non-additive: the inclusionof an additional lever does not always improve the performance of the macro prudentialregulation
    Keywords: Macro prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent-based computational economics
    JEL: C63 E52 E6 G1 G21 G28
    Date: 2015–12
  9. By: Lena Dräger; Christian Proaño
    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: 2016
  10. By: Pérez, Fernando (Banco Central de Reserva del Perú)
    Abstract: This paper assesses and compares the effects of monetary policy shocks across Latin American countries that put in practice the Inflation Targeting scheme (Brazil, Chile, Colombia, Mexico and Peru). An estimated Hierarchical Panel VAR allows us to use the data efficiently and, at the same time, exploit the heterogeneity across countries. Monetary shocks are identified through an agnostic procedure that imposes zero and sign restrictions. We find a real short run effect of monetary policy on output (with a peak around 12-15 months); a significant medium run response of prices with the absence of the so-called price puzzle and a hump-shaped response of the exchange rate, i.e. weak evidence of the so-called delayed overshooting puzzle phenomenon. Nevertheless, we find some degree of heterogeneity on the impact and propagation of monetary shocks across countries. In particular, we find stronger effects on output and prices in Brazil and Peru relative to Chile, Colombia and Mexico and a stronger reaction of the exchange rate in Brazil, Chile and Colombia relative to Mexico and Peru. Finally, we present a weighted-averaged impulse response after a monetary shock, which is representative for the region. *Note: Winning article in the 2015 Rodrigo Gómez Central Bank Award, organized by the Center for Latin American Monetary Studies (CEMLA). The article will be published by this institution.
    Keywords: Panel Vector Autoregressions, Sign Restrictions, Bayesian Hierarchical models
    JEL: E43 E51 E52 E58
    Date: 2015–12
  11. By: Ceri Davies (Birmingham University); Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak (CERGE-EI Prague)
    Abstract: The paper uses a monetary economy to derive a ‘Taylor rule’ along the dynamic path and within the business cycle frequency of simulated data, a Fisher equation within the low frequency of simulated data, and predictions of Lucas-like policy changes that shift balanced growth path equilibria and expectations. The inflation coefficient is always greater than one when the velocity of money exceeds one, thus exhibiting robust Taylor principle behavior in a monetary economy. Successful estimates of the magnitude of the coefficient on inflation and the rest of the interest rate equation are presented using Monte Carlo simulated data for both business cycle and medium term frequencies. Policy analysis shows the biases in interest rate predictions as depending on whether changes in structural parameters and expectations about variables are correctly included.
    Keywords: Taylor rule, Fisher equation, velocity, expectations, misspecification bias, policy evaluation.
    JEL: E13 E31 E43 E52
    Date: 2016–01
  12. By: Wensheng Kang; Ronald A. Ratti; Joaquin L. Vespignani
    Abstract: he value of the US dollar is of major importance to the world economy. Global liquidity has grown sharply in recent years with growing importance of China’s money supply to global liquidity. We develop out-of-sample forecasts of the US dollar exchange rate value using US and non-US global data on inflation, output, interest rates, and liquidity on the US, China and non-US/non-China liquidity. Monetary model forecasts significantly outperform a random walk forecast in terms of MSFE at horizons over 12 to 30 months ahead. A monetary model with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of variables in forecasting the US dollar. China’s liquidity has a distinct, significant and changing influence on the US dollar exchange rate. Post global financial crisis, increases in the growth rate in China’s M2 forecast a significantly higher value for the US dollar 12 months and 18 months ahead and significantly lower values for the US dollar 24 and 30 months ahead.
    Keywords: China’s liquidity, trade-weighted US dollar, forecasting US dollar exchange rate
    JEL: E41 E51 F31 F41
    Date: 2016–01
  13. By: Bhattarai, Saroj (University of Texas at Austin); Egorov, Konstantin (Pennsylvania State University)
    Abstract: We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher.
    JEL: E31 E52 E58 E61 E62 E63 F41
    Date: 2016–01–01
  14. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Haroon Mumtaz (Queen Mary College)
    Abstract: We use a TVP-VAR model to investigate possible changes in the time series properties of key Norwegian macroeconomic variables since the 1980s. The sample period is characterised by deregulation, globalization, sizable petroleum revenues, a switch from exchange rate to infl?ation targeting and adoption of a policy rule for the use of petroleum revenues.We fi?nd that the long-run means of CPI and core in?flation rates declined signifi?cantly until the mid-1990s and have since then remained close to the ifln?ation target of 2.5% from 2001 onwards. The persistence in especially CPI infl?ation has fallen during the infl?ation targeting period while the volatility of both infl?ation rates and the nominal effective exchange rate has increased. We document an increase in the correlations between money market rates and the in?flation rates as well as the output gap during the in?flation targeting period and a steady decline towards zero in the correlations between money market rates and nominal exchange rate changes. There is evidence of an increase in the correlations between oil prices and the other macroeconomic variables over time. Our counterfactual analysis suggests oil shocks to have been important for output gap and in?flation volatility while monetary policy shocks have been important for driving infl?ation persistence and the correlation of money market rates with macroeconomic variables.
    Keywords: Time-varying coefficients, stochastic volatility, persistence, great moderation, inflation targeting
    JEL: C51 E31 E32 E52 E58
    Date: 2015–12–31
  15. By: Diez, Federico J. (Federal Reserve Bank of Boston); Gopinath, Gita (Harvard University)
    Abstract: Since 2014:Q3, the U.S. dollar has experienced the third-fastest appreciation in over 30 years, with its nominal exchange and real exchange rate rising 15 percent against almost all foreign currencies (as measured by the Major Currencies Dollar Index). This sudden and rapid gain has engendered concerns about how a stronger dollar will affect U.S. export and import prices and ultimately, consumer prices and inflation in the United States. This paper assembles a rich database, spanning the period from 1985:Q1 through 2014:Q4, that combines several measures of prices and exchange rates in order to examine the likely outlook for U.S. import and export prices and consumer prices in the short run (one quarter) and over a 24-month period.
    Keywords: exchange rates; pass-through; inflation
    JEL: E31 F31 F41
    Date: 2015–12–01
  16. 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
  17. By: Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate depreciations are positively correlated with the probability of default by borrower firms and turn out to be a powerful mechanism to affect aggregate consumption. Throughout the monetary policy evaluation exercises performed, the sign of the unexpected depreciation is positively correlated to the real value of assets and negatively correlated to aggregate consumption. This result supports the idea that unexpected exchange rate depreciations are contractionary and not expansionary if dollarization and agency costs in the financial sector are considered.
    Keywords: Phillips Curve, Monetary Policy, Financial Dollarization, Financial Intermediation, Agency Costs, Small Open Economy
    JEL: E31 E44 F41 G21
    Date: 2015–12
  18. By: Bhattarai, Saroj (University of Texas at Austin); Chatterjee, Arpita (University of New South Wales); Park, Woong Yong (University of Illinois at Urbana-Champaign)
    Abstract: We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five” countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets.
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2015–11–01
  19. By: Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
    Abstract: This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a twocountry macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, we find that foreign ownership of banks amplifies spillovers from foreign shocks. It also strenghtens the international transmission of monetary and macroprudential policies. We next replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also show that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks.
    Keywords: foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking
    JEL: E32 E44 E58
    Date: 2016
  20. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Greater Boston Chamber of Commerce Government Affairs Forum, Boston, Massachusetts, January 13, 2016.
    Date: 2016–01–13
  21. 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
  22. 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
  23. By: Vincent Sterk (University College London); Silvana Tenreyro (London School of Economics)
    Abstract: This paper studies a redistribution channel for the transmission of monetary policy. Using a tractable OLG setting in which the government is a net debtor, we show that standard open market operations (OMO) conducted by Central Banks have significant revaluation effects that alter the level and distribution of wealth in the economy and the real interest rate. Specifically, expansionary OMO generate a negative wealth effect (the private sector as a whole is a net creditor to the government), increasing households’ incentives to save for retirement and pushing down the real interest rate. This, in turn, leads to a substitution towards durables, generating a temporary boom in the durable good sector. With search and matching frictions, a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand, raising aggregate employment. The mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions. The model shows that different monetary interventions (e.g., OMO versus helicopter drops) can have sharply different effects on activity.
    Date: 2016–01
  24. By: Ratti, Ronald (School of Business, University of Western Sydney); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: This paper investigates the relationship between oil prices, and global output, prices, central bank policy interest rate and monetary aggregates with a global factor-augmented error correction model. We confirm the following stylized relationships: i) in line with the quantitative theory of money, at global level, money, output and prices are cointegrated; ii) positive innovation in global oil price is connected with global interest rate tightening; iii) positive innovation in global money, price level and output is connected with an increase in oil prices; iv) positive innovations in global interest rate are associated with a decline in oil prices; v) positive shocks to the trade weighted U.S. dollar are linked with reductions in oil price; vi) the U.S., Euro area and China are the main drivers of global macroeconomic factors.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVEC
    JEL: E44 E50 Q43
    Date: 2015
  25. By: Kabukcuoglu, Ayse (Koç University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel interpretation of the forecasting implications of the workhorse openeconomy New Keynesian model (Martínez-García and Wynne (2010), Kabukcuoglu and Martínez-García (2014)). We find that incorporating spatial interactions yields significantly more accurate forecasts of local inflation in 14 advanced countries (including the U.S.) than a simple autoregressive model that captures only the temporal dimension of the inflation dynamics.
    JEL: C21 C23 C53 F41
    Date: 2016–01–01
  26. By: Murendo, Conrad; Wollni, Meike
    Abstract: Despite the fact that the use of mobile money technology has been spreading rapidly in developing countries, empirical studies on the broader welfare effects of the technology on rural households are still limited. Using household survey data, we analyse the effect of mobile money on household food security in Uganda. Unlike previous studies that rely on a single measure of food security, we measure food security using two indicators – a food insecurity index and food expenditures. To account for selection bias in mobile money use, we estimate treatment effects and instrumental variables regressions. Our results indicate that the use of mobile money per se as well as the volumes transferred are associated with a reduction in food insecurity. Furthermore, the use, frequency of use, and volumes of mobile money transferred are associated with increases in food expenditures. Policy interventions and strategies aiming to improve household food security should consider the promotion of mobile money among rural households in Uganda and other developing countries as a promising instrument.
    Keywords: mobile money, food security, households, Uganda, Consumer/Household Economics, Financial Economics, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, International Development, G29, I31, O16, O33,
    Date: 2016–01
  27. By: Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania); Matei, Marius (Tasmanian School of Business & Economics, University of Tasmania); Treepongkaruna, Sirimon
    Abstract: We formally test that a process containing Brownian motion and jumps characterises the high frequency observations for eight Asian currencies against the US dollar. By harnessing the changes in behaviour of the data during periods of stress we develop a new indicator to detect stress dates in currency markets. We find that the global share of currency trade for each currency relates to the frequency of stress days detected. We align the stress dates to economic and political conditions using central bank and IMF reports on developments in currency markets.
    Date: 2014–09
  28. By: Xavier Ragot
    Abstract: The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in a heterogeneous-agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol–Tobin literature, are introduced. Studying each friction in turn, one finds that the financial friction explains more than 78% of total money demand.
    Keywords: Money Demand; Money Distribution; Heterogenous Agents
    Date: 2014–03
  29. By: Tsz-Kin Chung (Tokyo Metropolitan University); Cho-Hoi Hui (Hong Kong Monetary Authority); Ka-Fai Li (Hong Kong Monetary Authority)
    Abstract: Although the affine Gaussian term-structure model has been a workhorse model in term-structure modelling, it remains doubtful whether it is an appropriate model in a low interest rate environment because of its inability to preclude negative interest rates. This paper uses an alternative quadratic Gaussian-term structure model which is well known to be as tractable as the affine model and yet is suitable for interest rates close to zero. Compared with the quadratic model under the zero lower bound, we illustrate how the estimated term premium can be biased upward under the affine model. In contrast to the affine model, our numerical study shows that the quadratic model renders the estimated term premium less likely to be affected by the persistence of the data near the zero lower bound.
    JEL: C32 E43 E44 E52
    Date: 2015–10
  30. By: ACHARYA, Suchant; BENGUI, Julien
    Abstract: This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy's adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period where many advanced economies were pushed to the zero bound on interest rates. We establish three main results: (i) When the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. (ii) A free capital flow regime falls short of supporting efficient demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. (iii) When it comes to capital flow management, individual countries' incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes.
    Keywords: Capital flows; International spillovers; Liquidity traps; Uncovered interest parity; Capital flow management; Policy coordination; Optimal monetary policy
    JEL: E52 F32 F42 F44
    Date: 2015
  31. By: Aleksandra Hałka; Jacek Kotłowski
    Abstract: In the paper we investigate, which shocks drive inflation in small open economies. We proceed in two steps. First, we use the SVAR approach to identify the global shocks. In the second step we regress the disaggregated price indices for selected European economies - the Czech Republic, Poland and Sweden- on the global shocks controlling for the domestic variables. Our results show that in two out of three analyzed countries the fluctuations of inflation are to the largest extent determined by the cyclical movements of the domestic output gap with the commodity shock being also the important source of inflation variability while for the third country the contribution of the commodity shock dominates over the output gap in explaining inflation fluctuations. We find that the direct impact of the global demand shock on the price dynamics is negligible, while it affects the country’s inflation mainly through the domestic output gap. The role of the non-commodity global supply shock is less prominent, however, this shock, interpreted to some extent as a globalization shock, for most of the analyzed period lowers the prices of semi-durable and durable goods and therefore the inflation. Nonetheless, in the aftermath of the global financial crisis, this shock reversed what may be interpreted as a weakening of the globalization process.
    Keywords: Inflation, monetary policy, globalization, disaggregated price indices, output gap, exchange rate pass-through, SVAR models.
    JEL: C53 E31 E37 E52
    Date: 2016
  32. By: Jose Luis Nolazco; Pablo Pincheira; Jorge Selaive
    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.
    Keywords: Chile , Economic Analysis , Working Paper
    JEL: E31 E17 E37 E52 E58
    Date: 2016–01
  33. By: Benjamin Eden (Vanderbilt University)
    Abstract: I study the question in the title in an economy that may have overvalued assets that can pop and lead to financial instability. Assets with no fundamentals are not easily detected and can be distinguished from assets with fundamentals only if someone buys information about the underlying project. When information is not private, there is a strictly positive probability that no one will buy it and the bubble-like asset will have value. When the government increases the interest rate, assets with no fundamentals have no value but welfare goes down. Thus an increase in the interest rate may promote financial stability but reduce welfare.
    Keywords: Financial Stability, Bubbles, Monetary Policy, Informational Externalities
    JEL: E5 D0
    Date: 2016–01–26

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