nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒02‒12
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The QE experience : Worth a try ? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  2. International Transmissions of Monetary Shocks By Han, Xuehui; Wei, Shang-Jin
  3. The implications of liquidity expansion in China for the US dollar By Kang, Wensheng; Ratti, Ronald A.; Vespignani, Joaquin L.
  4. The welfare cost of inflation and the regulations of money substitutes By Eden,Benjamin; Eden,Maya
  5. Interbank market and central bank policy By Ahn, Jung-Hyun; Bignon, Vincent; Breton, Régis; Martin, Antoine
  6. Japan's Currency Intervention Regimes: A Microstructural Analysis with Speculation and Sentiment By Ronald McDonald; Xuxin Mao
  7. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma By Rey, Hélène
  8. The Quantity Theory of Money Revisited: The Improved Short-Term Predictive Power of of Household Money Holdings with Regard to prices By Jean-Charles Bricongne
  9. Money demand under free banking: Switzerland 1851-1906 By Gerlach, Stefan; Kugler, Peter
  10. Money in the Equilibrium of Banking By Jin Cao; Gerhard Illing
  11. International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound By Florian Huber; Maria Teresa Punzi
  12. Overcoming the Euro Crisis and Prospects for a Political Union By Paul J.J. Welfens
  13. Unconventional Monetary Policy and Bank Lending By Nobuhiko Mitani
  14. Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Networks A Model of Incentives with Heterogeneous Agents By Muriel Fadairo; Cintya Lanchimba; Miguel Yangari
  15. Monetary Policy and Corporate Bond Returns By Alexandros Kontonikas; Paulo Maio; Zivile Zekaite
  16. Economic conditions and monetary policy in a changing world By Kaplan, Robert Steven
  17. Monetary Policy According to HANK By Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
  18. Liquidity traps, capital flows By Acharya, Sushant; Bengui, Julien
  19. What drives inflation expectations in Brazil? Public versus private information By Waldyr D. Areosa
  20. Does Money Impede Convergence? By John Hey; Daniela Di Cagno
  21. The Signaling Effect and Optimal LOLR Policy By Mei Li; Frank Milne; Junfeng Qiu
  22. What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending By Chen, Kaiji; Ren, Jue; Zha, Tao
  23. Credit subsidies By Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
  24. On the Desirability of Capital Controls By Heathcote, Jonathan; Perri, Fabrizio
  25. "Complementary Currencies and Economic Stability" By Dimitri B. Papadimitriou
  26. A Critique of Modern Money Theory and the Disequilibrium Dynamics of Banking and Government Finance By Tianhao Zhi

  1. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (Centre de REcherches sur les Stratégies Economiques)
    Abstract: The ECB has decided to implement large-scale quantitative easing (QE) measures since March 2015 until September 2016. This unconventional monetary policy has had a variety of precedents, in the Japanese, UK and US economies. These experiments have been effective a tmodifying government and corporate bond yields, mostly in the UK and US and to a lesser extent in Japan. This conclusion is not context-free. The European QE has started in a deflation era which requires more activism and cooperation from the ECB and Euro area governments than in the UK and the US when their central banks embarked in QE. The success of the European QE will also depend substantially on the depreciation of the Euro and will require clear communication by the ECB that it is prepared to accept a large depreciation at least until the inflation rate goes back to its target.
    Keywords: Quantitative easing (EQ) measures; Unconventional monetary policy; Depreciation of the Euro
    Date: 2015–04
  2. By: Han, Xuehui; Wei, Shang-Jin
    Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. It combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks.
    Keywords: capital control; exchange rate regime; monetary policy independence; Taylor Rule; trilemma
    JEL: E42 E43 E52
    Date: 2016–01
  3. By: Kang, Wensheng (Kent State University); Ratti, Ronald A. (Western Sydney University); Vespignani, Joaquin L. (University of Tasmania)
    Abstract: The 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.
    JEL: E41 E51 F31 F41
    Date: 2016–01–01
  4. By: Eden,Benjamin; Eden,Maya
    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. 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 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 cost: 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: Debt Markets,Economic Theory&Research,Access to Finance,Emerging Markets,Political Economy
    Date: 2016–02–02
  5. By: Ahn, Jung-Hyun (NEOMA Business School); Bignon, Vincent (Banque de France); Breton, Régis (Banque de France); Martin, Antoine (Federal Reserve Bank of New York)
    Abstract: We develop a model in which financial intermediaries hold liquidity to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little liquidity on aggregate compared with the socially optimal amount. The model endogenously generates a situation of cash hoarding, leading to the associated market freezes or underinsurance against liquidity choice. The model therefore provides a unified framework for thinking, on the one hand, about policy measures that can reduce hoarding of cash by banks and, on the other hand, about liquidity requirements of the type imposed by the new Basel III regulation. In our model, banks hold tradable and nontradable assets. Nontradable assets are subject to a liquidity shock, and an injection of cash is required for the asset to mature if it is hit by the shock. Banks have access to an interbank market on which they obtain cash against their tradable securities. The quantity of cash obtained on this market is determined endogenously by the market value of the tradable assets and is subject to cash-in-the-market pricing. Banks holding an asset that turns out to be bad may be constrained on the interbank market and therefore may have to interrupt their nontradable project.
    Keywords: money market; liquidity regulation; nonconventional monetary policy; cash-in-the-market pricing
    JEL: E58 G21 G28
    Date: 2016–01–01
  6. By: Ronald McDonald; Xuxin Mao
    Abstract: his paper provides a unique examination of three sep- arate regimes of Japanese currency interventions between 1991 and 2004. It is the first research to jointly test the coordination and signalling chan- nels and the reaction function of central banks in an identified structural framework. The empirical research also involves testing an innovative microstructure framework considering 'sentiment' and fundamental infor- mation. There are several important ndings based on the analysis of the pa- per. Firstly, the shocks to the bond yield differential are the key driving force of the dynamics of the JPY/USD exchange rate, and have a strong long-run impact on speculation and sentiment. Secondly, with respect to the reaction function of the central bank, the interventions happened in clusters, and were the reactions to sharp appreciations of the JPY ap- preciation. Between 2003 and 2004, the central bank also reacted to the large speculation position and high sentiment on the yen's appreciation. Thirdly, the signalling channel was effective when the interventions were frequent. Fourthly, speculation and sentiment had strong effects on the changes in the exchange rate, and the coordination channel worked when the changes in exchange rate volatility were slow
    Keywords: Cointegrated VAR, Currency Intervention, Forward Rate Bias, Microstructure, Sentiment Measures, Speculation, Transmission Chan- nel, Reaction Function
    JEL: E31 E43 F31 F32
    Date: 2016–01
  7. By: Rey, Hélène
    Abstract: This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.
    Keywords: Global Financial Cycle; Monetary Policy; Trilemma
    JEL: F33 F41 F42
    Date: 2015–12
  8. By: Jean-Charles Bricongne (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique, Banque de France - Banque de France - Banque de France)
    Abstract: This article analyses the predictive power of household money holdings with regard to prices or current aggregates (consumption and disposable incomes) over the short term (i.e. over one quarter), as compared with that of other explanatory variables, namely unemployment and total monetary aggregates. Regardless of the approach used, in the short term, household holdings exhibit a comparative advantage over unemployment and total monetary aggregates. The gain in terms of RMSE compared to a simple autoregressive equation is often at least 10%. This is consistent with the quantity theory of money, which holds that there should be a fairly direct link between money and consumption with a limited lag. In the longer run (12 quarters), unemployment exhibits better forecasting properties than household money holdings, which is consistent with the findings of Stock & Watson (1999).
    Keywords: Quantity theory of money, household money holdings, inflation, forecasting
    Date: 2015
  9. By: Gerlach, Stefan; Kugler, Peter
    Abstract: This paper studies money demand in Switzerland under free banking before the establishment of the Swiss National Bank. We find that, in addition to income and the interest rate of savings deposits, the number of banks was an important determinant of long run money demand. It also played a role in the monetary adjustment process. We also detect a strong positive long run impact of real income and the interest rate spread on the number of banks. Moreover, positive deviation of the number of banks from long run equilibrium leads to a decrease in the money stock and leads to a fall in interest rates and an increase in real income.
    Keywords: free banking; monetary dynamics; money demand; Switzerland
    JEL: E41 E42 N13
    Date: 2015–12
  10. By: Jin Cao; Gerhard Illing
    Abstract: In most banking models, money is merely modeled as medium for transaction, but in reality, money is also the most liquid asset for banks. Central banks do not only passively supply money to meet demand for transaction, as often assumed in these models, instead they also actively inject liquidity into market, taking banksEilliquid 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 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 ex ante liquidity coverage requirement.
    Keywords: Central banking; liquidity facility; systemic liquidity risk JEL classification: G21; G28
    Date: 2015–12
  11. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study.
    Keywords: Zero Lower Bound, Shadow interest rate, Housing Market, Time-varying parameter VAR
    JEL: C32 E23 E32
    Date: 2016–01
  12. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW); Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The euro crisis and a new debate about immigration in Europe have undermined support for the EU while the unsolved Greek debt problems as well as the ECB’s quantitative easing policy have raised new crucial policy issues. It is necessary to identify the key issues of Eurozone stabilization and to clarify the economic benefits from monetary integration. As regards the economic welfare analysis of the euro, the new model presented shows the benefits of the euro’s reserve currency position, namely in the framework of a neoclassical growth model with seigniorage based on international reserve holdings. Discounted benefits are about 10 000 € per capita in a stable Euro area. Thus the benefits are bigger than often considered, at the same time one may raise the question of whether the existing institutional setting of the Eurozone is sufficient for achieving long-term stability and prosperity. As regards the envisaged third rescue package for Greece it is emphasized that a haircut of public creditors along with adoption of a Greek capital levy plus privatization efforts are required to achieve debt sustainability and growth. The traditional interpretation of subsidiarity in the EU is found to be misleading and the vertical division of politics is destabilizing.
    Keywords: Potential Output, Innovation, Knowledge Production Function, Macroeconomics, Globalization
    JEL: E23 F02
    Date: 2015–07
  13. By: Nobuhiko Mitani (Osaka School of International Public Policy, Osaka University)
    Abstract: In this paper, I analyze whether liquidity expanded and bank lending was increased by monetary easing in 2000 or not, using pane; data of Japanese bank and shinkin from 2000 to 2014. Analyzing above this, I got the result that lending through shinkin didn't expand and monetary easing didn't take enough effect which increased lending through liquidity expanding.
    Keywords: liquidity rate, nontraditional monetary policy, shinkin
    Date: 2016–01
  14. By: Muriel Fadairo (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Cintya Lanchimba (Escuela Politécnica Nacional, Quito, GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Miguel Yangari (Escuela Politécnica Nacional, Quito)
    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: moral hazard, commission rate, dual distribution, royalty rate,Franchising
    Date: 2016
  15. By: Alexandros Kontonikas; Paulo Maio; Zivile Zekaite
    Abstract: We investigate the impact of monetary policy shocks, measured as the surprise change in the Fed Funds rate (FFR), on the excess returns of U.S. corporate bonds. We obtain a significant negative response of excess bond returns to shocks in FFR, and this effect is especially strong in the period before the 2007-09 financial crisis and for bonds with longer maturity and lower rating. By using a VAR-based decomposition for excess bond returns, our results show that the largest part of the contemporaneous negative response of corporate bond returns to monetary policy tightening can be attributed to higher expected excess bond returns (higher bond risk premia). Therefore, the discount rate channel represents an important mechanism through which monetary policy affect corporate bonds. Our results also show that the importance of this eect has declined after the financial crisis
    Keywords: Corporate Bond Market, Variance Decomposition, Monetary Policy
    JEL: G10 G12 E44 E52
    Date: 2016–01
  16. By: Kaplan, Robert Steven (Federal Reserve Bank of Dallas)
    Abstract: Remarks before the Dallas chapters of Financial Executives International, the Association for Corporate Growth and the National Association of Corporate Directors.
    Date: 2016–01–11
  17. By: Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption.
    Keywords: consumption; earnings kurtosis; heterogeneous agents; inequality; liquidity; monetary policy; New Keynesian
    JEL: D14 D31 E21 E52
    Date: 2016–01
  18. By: Acharya, Sushant (Federal Reserve Bank of New York); Bengui, Julien (Federal Reserve Bank of New York)
    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 when many advanced economies were pushed to the zero bound on interest rates. We establish three main results. First, 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. Second, 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. And third, 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: 2016–01–01
  19. By: Waldyr D. Areosa
    Abstract: This article applies a noisy information model with strategic interactions à la Morris and Shin (2002) to a panel from the Central Bank of Brazil Market Expectations System to provide evidence of how professional forecasters weight private and public information when building inflation expectations in Brazil. The main results are: (i) forecasters attach more weight to public information than private information because (ii) public information is more precise than private information. Nevertheless, (iii) forecasters overweight private information in order to (iv) differentiate themselves from each other (strategic substitutability)
    Date: 2016–02
  20. By: John Hey; Daniela Di Cagno
    Abstract: Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of nonmonetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.
    Keywords: clearing house mechanism, double auction mechanism, experimental markets, money, monetised trading, non-monetised trading
    JEL: C92 D40 E24
  21. By: Mei Li (Department of Economics and Finance, University of Guelph); Frank Milne (Department of Economics, Queen’s University); Junfeng Qiu (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: When a central bank implements the LOLR policy in a financial crisis, bank creditors often infer a bank’s quality from whether or not it borrows from the central bank. We establish a formal model to study the optimal LOLR policy in the presence of this signaling effect, assuming that the central bank aims to encourage central bank borrowing to avoid inefficiencies caused by contagion. In our model, there are two types of banks: a high quality type with high expected asset returns and a low quality type with lower returns. Both types of banks need to roll over their short-term debts. A central bank offers to lend to both types of banks. After private creditors observe whether banks borrow from the central bank, banks try to borrow from the private market. We find that there may exist a separating equilibrium where only low quality banks borrow from the central bank; and two pooling equilibria where both types of banks do and do not borrow from the central bank. Our major results are as follows: (1) Considering the signaling effect, the central bank should set its lending rate lower than the prevailing market rate to induce both types of banks to borrow from the central bank. (2) Hiding the identity of banks borrowing from the central bank will encourage banks to borrow from the central bank. (3) The central bank may serve as a coordinator for the realization of its favored equilibrium.
    Keywords: Signaling, Lender of Last Resort
    JEL: E58 G28
    Date: 2016
  22. By: Chen, Kaiji (Emory University); Ren, Jue (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China.
    Keywords: Regulatory arbitrage; asset pricing; institutional asymmetry; entrusted loans; risk taking; shadow loans; bank loans; nonloan investment; nonbank trustees; small banks; large banks; balance sheet; optimal decisions
    JEL: E02 E5 G11 G12 G28
    Date: 2016–01–01
  23. By: Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
    Abstract: In a model with costly financial intermediation and financial disturbances, credit subsidies are desirable, irrespective of how they are financed. They are especially useful when the zero lower bound constraint is reached. They are superior to other credit policies such as direct lending. JEL Classification: E31, E40, E44, E52, E58, E62, E63
    Keywords: banks, costly enforcement, credit policy, credit subsidies, monetary policy, zero-lower bound on nominal interest rates
    Date: 2016–01
  24. By: Heathcote, Jonathan; Perri, Fabrizio
    Abstract: In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries.
    Keywords: capital controls; international risk sharing; terms of trade
    JEL: F32 F41 F42
    Date: 2016–01
  25. By: Dimitri B. Papadimitriou
    Abstract: A complementary currency circulates within an economy alongside the primary currency without attempting to replace it. The Swiss WIR, implemented in 1934 as a response to the discouraging liquidity and growth prospects of the Great Depression, is the oldest and most significant complementary financial system now in circulation. The evidence provided by the long, successful operation of the WIR offers an opportunity to reconsider the creation of a similar system in Greece. The complementary currency is a proven macroeconomic stabilizer--a spontaneous money creator with the capacity to sustain and increase an economy's aggregate demand during downturns. A complementary financial system that supports regional development and employment-targeted programs would be a U-turn toward restoring people's purchasing power and rebuilding Greece's desperate economy.
    Date: 2016–01
  26. By: Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This paper critically reviews and examines the relationship between the origin of disequilibrium macroeconomic thinking by John Maynard Keynes, and the development of Keynesian disequilibrium macroeconomic models. Given that the two strands of literature are both plentiful, I will focus on discussing the essence of Keynesian disequilibrium thinking, and its implications of relevant models in the context of Keynes-Metzler-Goodwin and Weidlich-Haag-Lux approaches.
    Keywords: disequilibrium macroeconomics; nonlinear economic dynamics; John Maynard Keynes; Hyman Minsky
    JEL: B22 E5 E12 G21
    Date: 2016–02–01

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